Consider the situation and verify the statement if it is true or not.
Situation: A student has been provided with three test tubes. One of them contains distilled water and the other two contain an acidic and basic solution.
Statement: The student can identify the contents of each test tube with red litmus paper only in two steps.

We can determine a solution's character, or whether it is basic or acidic. Blue litmus paper turns red when exposed to acid, and blue litmus paper turns red when exposed to base.

A red litmus changes to blue in basic conditions. So, firstly the student may check all three solutions with red litmus paper. The basic solution gives a blue litmus paper as a result. Acidic solution and water do not give any reaction. So, a basic solution is identified.
In the second step, students may use the litmus paper which is now blue in color with the remaining two solutions. The acidic solution changes the blue litmus paper to red. Thus, an acidic solution is identified. The remaining test tube will contain water. Thus the given statement is true.

Hence, the correct answer is option A.